Asset owners need to be more demanding of their fund managers – both external and internal – when it comes to climate investing objectives, according to speakers at a summit hosted by the London Stock Exchange last week.
Laura Hillis, director for climate and environment at the Church of England Pensions Board, told the Climate Investment Summit she had seen a lot of activity relating to how asset owners could ensure they were holding fund managers accountable, ensuring effective communication on their long-term investment horizon and its importance.
“Fundamentally, if asset owners ... want to get managers to respond, they have to be willing to move mandates," she said. "That’s a really difficult thing for them to do, but it has to be on the table for their objectives to be achieved.”
Hillis said that one of the challenges in that context was the fact that asset managers had much shorter-term perspectives than the average pension fund.
“While they tend to manage money on behalf of a lot of asset owners, we’re thinking about investing in companies on a 20-year view ... They might be thinking, 'We’re only going to have this asset in the portfolio for a couple of years'.”
Jenn-Hui Tan, global head of stewardship and sustainable investing at asset manager Fidelity International, echoed the view that asset owners should be more demanding.
“It’s the responsibility of the asset owner, not the asset manager – the asset manager has to work in service to the mandates we are given," he said. "Therefore, asset owners need to give those mandates and tell us that these are the things they want us to achieve.”
The event saw some discussion about what penalties or rewards might motivate fund managers to create more effective decarbonised portfolios.
Anita George, a member of the advisory council for finance at the International Solar Alliance, said: “I worked with [Canadian pension fund] CDPQ back in 2016, and we announced a carbon reduction target for the portfolio and an increase in green investment.
“In the first year, there was a lot of activity, but the results were inconclusive. In the third year of the programme, the CEO introduced a carbon factor and every investment professional in the organisation had their remuneration tied to how they performed according to that measure. The whole reality changed."
The Church of England Pensions Board recently announced it would no longer hold oil and gas companies in its portfolio.
“We're moving our focus to the demand side," said Hillis. "We're also talking to policymakers.
“I've found, talking to a lot of investors over the last two years, that it's really important to get the policy settings right, and for them to be coherent. What you find is, when investors are looking at market-level risk, what they want to see is a coherent set of policies. Having policies that subsidise fossil fuels while incentivising renewable energy development is not helpful.”
Jaakko Kooroshy, head of sustainable investment research at FTSE Russell said that for large investors thinking about portfolio alignment, “the challenge is to think about a strategy that really allows you to have a balanced approach, managing your exposure to current emissions – whether that's scope 1 or 2, or value chain emissions, while managing your exposure to future emissions reduction to ensure you're part of the story of transition finance – but also making sure you understand what is your exposure today and setting the right weightings."
A new paper published by FTSE Russell in collaboration with Singapore’s GIC and US asset manager GMO explores the benefits of green metrics such as weighted average green revenue (WAGR) in assessing portfolio exposure to climate solutions.
The paper says: “WAGR is a useful tool for investors to integrate climate solutions into portfolio construction as it's easier to interpret, directly links to companies' cashflows and real-world impact, and uses more readily available and comparable data.”
Investors can apply WAGR in different ways, including in climate reporting, target setting, thematic investing and corporate engagement, the paper says.
“We find WAGR to be the most promising metric currently for integrating climate solutions measurements into portfolio construction. It builds on the portfolio weighting methodology used in carbon metrics such as weighted average carbon intensity (WACI) ... widely adopted by investors."
WAGR calculates the green revenue percentage of a portfolio by applying a company-level green revenue percentage to the portfolio weight of each company. Investors can set portfolio-level targets for climate solutions using WAGR, such as a minimum level, an improvement relative to a benchmark, and can track specific WAGR pathways such as decarbonisation trajectories.